Trying to decide if TIPS (Treasury Inflation Protected Securities) or I-bonds belong in your investment portfolio? Both TIPS and I-bonds are government-backed investments that will protect your principal while earning interest. Unlike other investments, the interest rate is periodically adjusted for inflation. Let’s dig into their benefits, risks and differences and see which option matches your needs.
What is a bond?
Bonds are IOUs issued by corporations, federal, state and local governments and their agencies. When you buy a bond, you become a creditor of the corporation or government entity; you are owed the amount shown on the face of the bond (par value), plus interest.
What are Treasury inflation-protected securities (TIPS)?
Treasury inflation-protected securities (TIPS) are designed to provide inflation protection. They are sold as five, 10 or 30 year notes that are indexed to the rate of inflation on a daily basis as measured by the Consumer Price Index (CPI). Unlike other Treasury securities, where the principal is fixed, the principal of a TIPS can go up or down over its term.
Interest and earnings. TIPS owners receive interest payments twice per year. The payments on TIPS are based on the interest rate set at auction. The principal amount will adjust every six months according to inflation, which in turn determines the interest payment.
Buying, redeeming and selling TIPS. New TIPS can be purchased at auction at TreasuryDirect or from a bank, broker or dealer. The minimum purchase is $100 and TIPS are sold in increments of $100. The price and interest rate are determined at auction. Unlike I-bonds, TIPS are marketable securities and can be resold on the secondary market prior to maturity.
When the TIPS matures, if the principal is higher than the original amount, you get the increased amount. If the principal is equal to or lower than the original amount, you get the original amount.
What are I-bonds?
Series I savings bonds (I-bonds) protect you from inflation. I-bonds earn interest based on a fixed rate and inflation rate. Your bond's value grows both because it earns interest and because the principal value gets bigger. Unlike TIPS, you choose whether to report each year's earnings or wait to report all the earnings when you get the money for the bond. Even better, if you use the money for qualified higher education expenses, you may not have to pay tax on the earnings.
Interest and earnings. The actual rate of interest for an I-bond is a combination of a fixed rate and an inflation rate. The combined rate can, and usually does, change every 6 months. The new rates are announced every May 1 and November 1. Rate changes for your bond occur every 6 months from the issue date of your bond.
I-bonds earn interest monthly and it is compounded semiannually, meaning that every 6 months, the bond’s interest rate is applied to a new principal value. The new principal value is the sum of the prior principal and the interest earned in the previous 6 months. Your bond's value grows both because it earns interest and because the principal value gets bigger.
Buying, redeeming and selling I-bonds. You can purchase electronic I-bonds at any time online at TreasuryDirect. The minimum purchase is $25, and the maximum annual limit is $15,000. You may buy a maximum of $10,000 worth of I-bonds electronically and up to $5,000 of paper I-bonds. However, paper I-bonds can only be purchased using your federal tax refund.
While I-bonds mature fully after 30 years, you can cash them in after a year. If you redeem the bond in less than five years, you’ll lose the last three months of interest, but the interest accrued before that is yours to keep. There is no interest penalty for cashing in the bonds after five years. U.S. savings bonds can not be resold, only redeemed.
Three key differences:
- TIPS can be resold on the secondary market. I-bonds can not be resold.
- TIPS can be bought in five, 10 and 30 year maturities. I-bonds are sold in 30 year terms only
- You can buy up to $10 million worth of TIPS at auction and an unlimited amount in the secondary market. I-bonds purchases have an annual limit of $15,000 total —$10,000 in electronic bonds and $5,000 in paper bonds — per Social Security number
Three key similarities:
- Interest payments are subject to federal income tax but exempt from state and local taxes
- Each is backed by the full faith and credit of the U.S. government, designed to hedge against inflation and has a component that is adjusted in line with CPI movements
- Both TIPS and I-bonds can be redeemed after 12 months and prior to maturity
If inflation and investment safety are your chief concerns — TIPS and I-bonds deliver both. TIPS offer greater liquidity and the higher yearly limit allows you to stash far more cash in TIPS than I-bonds. If you’re saving for education, I-bonds may be the way to go. Interest earned from I-bonds may be excluded from federal income taxes if you use the money for qualified education expenses and don’t exceed income limitations. TIPS and I-bonds offer you two great ways to safely save for the future.
Donna joined Kiplinger as a personal finance writer in 2023. Previously, she spent more than a decade as the contributing editor of J.K.Lasser's Your Income Tax Guide and edited state specific legal treatises at ALM Media. She has shared her expertise as a guest on Bloomberg, CNN, Fox, NPR, CNBC and many other media outlets around the nation. Donna graduated from Brooklyn Law School and University at Buffalo.
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